recession

Many people are ardently supporting Trump’s trade war, driven by a combination of anger, fear, hubris and confusion. While there’s no doubt that globalization has inflicted misery upon many Americans, there are numerous myths and delusions surrounding the clamor for tariffs and trade wars, especially against China. Let’s take a look at some of the popular ones.

We are losing $500 billion every year to China

This is based on the fact that we have a trade deficit in goods for about $500B. However, it doesn’t include services, where we have a surplus with China. Count that in, the total trade deficit drops to $380B. But that’s only mainland China. Add Hong Kong, the number drops to $350B.

Then there’s the global supply chain. China imports a lot of natural resources and components from other countries to manufacture and assemble the finished goods. Subtract those costs, the real trade surplus for China drops to about $100B. (For example, Apple pays $500 to “import” an iPhone, from which China makes only $20).

Finally, 40% of “Chinese” exports are actually products of foreign (multi-national) corporations based in China.

“Chinese” goods may be American, Japanese, South Korean, German etc.

China is ripping us off!

As I described in another article, US oligarchs and corporations decided to move American jobs abroad. Also, US consumers and businesses benefit from inexpensive Chinese goods and labor. So, let’s not blame China for the lost manufacturing jobs.

They don’t buy our products

GM sells more cars in China than in the US; and Apple sells more iPhones in China than in the US. For semiconductor giant, Qualcomm, 65% of their revenues come from China. Boeing sold 1000 planes to China in the last five years. In fact, most major US corporations consider China as their #1 or #2 market. So, yes, China has a very open market and it buys a lot of American services and goods, but a lot of them happen to be made in China. Similarly, corporations such as Starbucks, McDonald’s, KFC etc. profit enormously from their thousands of branches in China.

Chinese products are crap

If Chinese products are crap, why do Americans keep spending $500 billion a year on buying crappy things? Don’t forget that BMW manufactures the most number of cars in China. Also, iPhones, Nike shoes and Prada bags are all made in China. And Chinese brands like Huawei and OnePlus are actually beating Apple. So it’s not as if Chinese can’t make high-end, high-quality products.

That said, if you pay someone $1 an hour, don’t expect amazing products that will last for a lifetime. Also, Chinese corporations are working their way up the value chain. Chinese high-end smartphones (Xiaomi and OnePlus) are already #1 in large consumer markets such as India; and, within five years, Chinese electric cars will be globally popular as well.

Everything in China is made by slave labor

Western corporations like Nike, Apple and Walmart can easily get rid of sweatshops by agreeing to pay a little more and setting guidelines for working conditions, but they don’t and won’t. Also, China is quickly adopting hi-tech manufacturing, and many of the low-end factories are being shifted to Vietnam, Indonesia etc. where wages are half that in China. Many Americans care about “slave labor” only when their jobs are threatened.

We want Fair Trade and China must lower their tariffs

It’s not as if the only thing that stands in the way of US progress is China’s tariffs. Consider that we imported 8 million cars last year. Maybe we should buy American goods, before we demand that others buy American products.

Also, even if China eliminates their tariffs on our exports, US corporations will find that it’s still cheaper to manufacture goods in China, rather than making them here and shipping them over.

Let’s not forget that the US already has a lot of protectionist tariffs, quotas, barriers and subsidies for various products and business sectors. Every government in the world has to cater to its people and special interest groups.

Finally, since WWII, the US has enjoyed an extraordinary privilege of being able to easily print the global reserve currency and wantonly borrow from the rest of the world. For a true “level playing field,” all currencies must be equal, which Americans won’t easily accept. (Imagine if China could sanction western countries and arrest western CEOs for violating Chinese sanctions!)

They operate at losses and dump products

There are some state-operated Chinese entities that keep operating while losing money and simply rolling over their debt. China allows that to create employment for its people and also, sometimes, to capture the global market. However, US corporations such as Amazon, Uber, Netflix and others do the same, with the only difference being that the US corporations are subsidized by commercial banks and the Federal Reserve Bank.

They steal our IP

Most of these accusations are unwarranted. If China is stealing our IP, how come Tesla just opened a new plant in Shanghai and Boeing just announced a new factory in China? If China is a thief, how come Intel Corp. has funded Horizon Robotics, a Chinese startup? If China is a threat, why does Warren Buffet own 10% of BYD, China’s biggest electric car manufacturer? Every western hi-tech firm — Google, Microsoft, Amazon, Dell etc. — has branches in China and they wouldn’t do it if China is just stealing their IP.

Yes, China required transfer of technology in many industries, but it was a voluntary, consensual business transaction. Driven by greed to conquer the Chinese consumer market, western corporations obliged. Also, arrogance made the West assume that Chinese copycats will never be good enough.

There are definitely problems with Chinese espionage and those must be opposed and stopped.

But they’re commies!

In spite of China’s “communist” party, CCP, what they have is a unique mix of socialism, capitalism and Confucianism. The private sector is vibrant — 90% of new jobs are created by private enterprises, venture capitalists are investing more in Chinese startups than in American counterparts, the upper middle class is growing rapidly (200 million), there are 3.5 million millionaires and two new billionaires were created every week last year. China is not your textbook “communist” country.

While the Chinese government is certainly authoritarian, relative to western democracies, it has accomplished an economic miracle over the last four decades that’s unprecedented in human history. 800 million people were lifted out of poverty and the GDP grew 40-fold in 40 years. That’s why 84% of Chinese trust their government and 68% say that the government is the best institution to lead the country to a better future.

Tariffs will bring back jobs

Tariffs can bring back jobs if they are large, long-lasting and target all countries. However, Trump’s 10% or 25% tariff on Chinese goods won’t create enough incentive for most manufacturers to start building products in the US. At the most, US companies will simply move the manufacturing to other developing nations such as Vietnam, Thaliand etc. Moreover, Chinese Yuan has already fallen 10%, thus largely neutralizing the first round of tariffs.

Considering that every major business/lobbying group, corporation and economist is against tariffs and trade wars, it’s highly unlikely that jobs are going return from Asia, Mexico and elsewhere.

Tariffs and retaliatory tariffs can also lead to a big loss of jobs or even a recession. There have already been endless stream of stories about layoffs and lost sales.

While it’s true that some Japanese and German automakers who want to avoid confrontations may build new assembly plants in the US, others may be forced to relocate some existing factories from the US to Europe and China to avoid the cross-border tariffs.

We will win the trade war!

China is the world’s #1 exporter, #2 importer and #1 trading country. Last year, China’s total global trade was over $4 trillion, of which only 17% was US-China trade. The chart below shows how China has many other important trading partners:

Yes, we buy more from China and thus can impose more tariffs on them than vice versa, but we’re not doing it as a charity. Without Chinese goods and labor, many US corporations like Apple will literally go bankrupt in a short time — it’s not easy to find another place where people can assemble 200 million iPhones a year.

Don’t forget that 16 million Americans work in retail. What will they sell without Chinese goods?

Conclusion

There won’t be any winner in the trade war. China in 2018 isn’t China in 1990.

To make things worse, Trump’s goals and the “mad man” strategy are confusing and chaotic, and he doesn’t have any support from the business and political establishments. Perhaps if the US and EU act in unison, they can convince China to open up their economy more in certain sectors. For example, in the last month, China has allowed American Express to operate in China and has opened up its insurance business to Allianz, a German company. At the same time, the West should be mindful of history — the Opium Wars and the following Century of Humiliation are etched in the Chinese national psyche. China has worked very hard and scarificied a lot in the last forty years; and they’re not going to give up their dreams. So, let’s get rid of the zero-sum mentality, drop the aggressive posture, come up with tangible goals, and negotiate with respect and a smile.